We have been covering blockchain since 2010 and reading the first Bitcoin whitepaper. Like many people, we struggled for a long time just to understand what a blockchain was and why it matters. Since we were financial analysts, we found it particularly hard to find ways to invest in the emergence of the space. Until fairly recently, buying Bitcoin has been hard to do, and even today, investing in digital tokens beyond the few largest coins remains cumbersome. To say nothing of the risks involved, of which there are many.

So how does someone participate in the immense returns that seem to be on offer in the crypto space (emphasis on ‘seem’)? In this post we will run through some ways to invest in crypto-related companies. In a future post (probably many), we will look at ways to think about investing directly in coins.

To begin with, a question we get a lot from investors is how to invest without buying actual cryptoassets. As we plan to explore at some point, financial institutions still face a lot of hurdles in buying coins (e.g. custody, clearing, etc.). In the public equities space, there is a general scarcity of investment vehicles. This is a problem common in tech today, with many start-ups delaying public offerings, which means that venture and other early investors are able to capture most of the valuation upside.

The notable exception to this has been a couple chip stocks – Nvidia and AMD. These companies produce GPUs, and much of the world’s blockchain mining is done on GPUs. Both companies saw a tremendous run-up in recent times, in part due to the strong demand for GPUs for crypto mining, as well as the excitement around Artificial Intelligence, which also relies heavily on GPUs. This demand seems to have tapered off lately, as has been noted by both companies. It is also important to note that crypto is still a relatively small part of both companies’ operations. [Note: We own a small position in AMD stock.] Similarly, it has lately become known that TSMC, the world’s largest semiconductor foundry is doing a very large amount of crypto-related business. Again, crypto is just a small part of this company’s operations, so it is not a ‘pure’ crypto investment. One company that makes specialty crypto chips n China has recently filed to go public in Hong Kong, but that is pretty much it when it comes to crypto investments. In theory, you could short some sector, like banks or stock exchanges, that threatens to be ‘disrupted’ by blockchain, but you will likely end up waiting a very long time for that trade to work out.

Beyond this, most companies involved in crypto are private. In the chip space, the best known company is China’s Bitmain, which did something like $2.5 billion in revenue in 2017 selling crypto ASICs, chips specifically designed for blockchain mining. There are a handful of other companies in this space, all of which are private, and based outside the US.

So let’s move to software. When investing in high-growth, high volatility tech spaces, a favorite investment approach is to invest in the “picks and shovel” of the market. That is to say, buy companies that make tools that enable the rest of the ecosystem. The idea being that it is hard to pick which plot of land will yield ore in a gold rush, but everyone is buying lots of things to dig up the ground. Set aside the fact that this metaphor is overused and of dubious merit, even here there are some difficulties in finding investments. The software behind most blockchains are open source, and so there are very few sizable companies that develop blockchains for others. Having this skill on your resume is pretty much a guarantee of employment right now, but there seems to be no sustainable business here.

Another approach is to buy exchanges, markets where cryptoassets are traded. Even though all blockchains are ledgers keeping track of trades, the process of trading still needs an exchange where parties can agree on the price of that trade. There are already a number of large exchanges – Coinbase is probably the best known in the US, but there many more including Kraken, Genesis, Circle and Bitmex among many, many others. All are privately held. (And of course, there are a number of crypto projects looking to decentralize the exchange on a blockchain.)

These exchanges have seen tremendous growth, but they have also already attracted considerable investment. Circle raised $110 million last month, on top of $146 it had raised over four previous rounds. Coinbase raised $108 million in August. The list goes on. As an employee at one of the exchanges told us last week, much of the upside may have already been priced into these companies’ valuations.

All of this leads back to the pretty obvious conclusion. Those interested in participating in the cryptoasset boom need to take a look at investing directly in tokens. This is process full of risks, but we will explore some ways to think about the space in a future post.